Kiss Oct Goodbye

Good Morning,

Just one or two more days of trading Oct before it slides into BOM – before that happens I wanted to take a quick tour of the Oct products and offer up my thoughts, beginning with Mid-C Oct onpeak:


Two thoughts here: note the convergence of the market to the forecast, it has been wrong for the last month – and now it’s right and I don’t see a lot of upside in shorting at $24.75, in fact I’d probably be long given that the two value measurement metrics (the forecast and the market) are now in sync.  But I also don’t see a lot of upside in owning it given Oct’s current position in the stack:


Note there is about the same amount of upside as downside ($4.77 and $3.50, respectively).  Probably the best strategy for Oct Mid-C on peak is to close it out and focus on better opportunities.     Moving south, the SP heavy appears a bit heavy:


Unlike the Mid-C, the SP has diverged from the forecast, probably in sympathy with cash; cash which was driven by 100+ degrees in the LA valleys, something that most likely won’t happen.  Out of 59,000 hourly observations at Burbank during October  (since 1989) only 60 posted temperatures north of 100 degrees, and only two of those occurred after Oct 10.  Given that the current forecast covers covers the first 10 days of October, and its normal, the chances of a big heat event is very low.  Add on the renewables and distributed solar and we think, as does the model, that its not worth more than the low 30s.  So that means we are bearish on the spread (we as in me, I’ll let Scott share his own thoughts on that)?  Yes, it does.


It’s just the SP chart since the forecast and market are identical at Mid-C, though I’d rather put on an Oct position through the spread as I see upside on both legs – and have the option of flipping it into an outright at any time.   Now let’s look at Nov, soon to be prompt month, beginning with Mid-C outright:


I look at that and say “over sold”, especially with a slight uptick in the forecast over the last few weeks and the market entrenched around $26.  Sure, the DC is down, the AC derated, but we still have the northern intertie that can absorb most of those cuts plus a very high probability of a cold snap sometime between late Oct and Nov …and besides, the reservoirs are still below normal.  Our Price Inflection report supports this sentiment:


A 5000 MW bearish event at Mid-C drops price almost $3.00 while the same MW bullish event raises price $26.00 … that is a non-linear relationship and one that makes me a Novy bull, at least at Mid-C.  SP is the mirror image … an over-priced strip driven by recent heat anomalies that have 0, ZERO, chance of replicating themselves in November:


The market rallies, the forecast withers, though stable for last few weeks as the RFC seems to be locking in its Nov forecast.   A glance at the inflections (see above) shows SP with a -6.00/+4.00 risk reward ratio – clearly biased on the downside (contrasted that wih Mid-C’s -3/+26 ratio).  Put me down as bearish SP Nov.  How about the spread?


Uuuhhhh, sold!  Not necessarily saying it will settle $2.41, though it settled lower in the last six years, and this is the lowest the reservoirs have been in the last six years, AND the lowest gas prices …but the DC is down, though I say so what.  SP added another 1gw of solar, it’s El Nino.  I’m @ Nov SP-MidC.

I know most of these positions are contrary to the recent trend and after all, the trend is your friend, right?  Isn’t it?  LOL … the trend is your worst enemy when it isn’t your friend and the key is to decide when the trend is stupid.  Me thinks we are getting close to stupid prices.

Kind Regards,